The outlook for the ratings has been changed to stable, from positive

[mcveyvif.com]

New York, October 16, 2013 -- Moody's Investors Service has affirmed the Baa3 senior debt rating of Odyssey Re Holdings Corp. (Odyssey Re) and the A3 insurance financial strength rating of Odyssey Reinsurance Company. The outlook for the ratings has been changed to stable, from positive. Odyssey Re is a wholly-owned subsidiary of Fairfax Financial Holdings Limited (Fairfax - senior debt at Baa3, stable outlook).

 

is this a positive rating change? I'm not an insurance expert, by any means, but would appreciate comments on the signifigance of this moody rating info

 

RATINGS RATIONALE

 

According to Moody's, Odyssey Re's ratings reflect the company's well established and diversified position in the US and international property/casualty broker (re)insurance markets, solid financial profile and strong underwriting results, and the growth of specialty primary insurance in the overall business mix. The company's underwriting leverage is appropriate for its business mix and risks.

 

These strengths are tempered by the underwriting volatility and pricing uncertainty inherent in some of the company's chosen lines of business, which include catastrophe-exposed property and casualty-based exposures, the growing competition from the alternative market on some of the firm's largest property cat segments, the potential for adverse reserve development from long tail casualty exposures, increased level of high risk assets - primarily common equities and derivatives (while the derivatives are primarily intended to provide downside protection, they entail basis, liquidity and counterparty credit risks that the company manages actively but has not fully offset), and substantial debt leverage at the Fairfax group level, said Moody's. ORH is the largest subsidiary of Fairfax Financial Holdings Limited (TSX: FFH).

 

Moody's stated that, with the exception of the above average catastrophe losses in 2011, the company has delivered strong underwriting results in recent years, with a combined ratio of approximately 85% for Q2, 2013, down from approximately 94% in 2009. The strong underwriting results have, to an extent, been offset by lower total returns on investment in recent years, mainly the result of the investment income being depressed in the low interest rate environment, and lower realized gains and in some cases, realized losses on the investment portfolio, including derivatives. This has had a dampening effect on net income and return on equity, which decreased to 5.8% for Q2 2013, from 12.1% in 2009.

 

Moody's noted several factors that could lead to an upgrade of Odyssey Re's ratings: 1) continued development of the core franchise while maintaining a moderate catastrophe risk profile; 2) maintaining profitability at levels above peers to compensate for the higher risk investment strategy; 3) maintaining gross underwriting leverage at around 2.5 times; 4) adjusted financial leverage at Fairfax consistently below 25% and earnings coverage (excluding realized gains/losses) consistently above 5x; and 5) reduction in concentration (both direct investment and uncovered derivative positions) to single name equities and exposures to other high risk assets.

 

Conversely, the following factors could lead to a downgrade of Odyssey Re's ratings: 1) a decline in shareholder's equity of more than 10% on a rolling 12 month basis; 2) adverse loss reserve development greater than 5% of carried reserves on a rolling twelve month basis; or 3) Fairfax's financial flexibility deteriorates such that holding company liquidity drops below $750 million (or less than 3x total fixed charges) or adjusted financial leverage/total leverage rises above 35% or 4) earnings coverage (excluding realized gains) consistently less than 2x.

 

The following ratings have been affirmed with a stable outlook: